New Democrats’ Surge in Polls Prompts Concern About Higher Canadian Taxes

By Greg Quinn and Theophilos Argitis -
Apr 27, 2011

The surging popularity of Canada’s
New Democratic Party and the prospect it may gain a share of
power has undercut the Canadian dollar and sparked economists’
concerns about higher taxes.

The pro-labor NDP has become the second-most popular
political party, three polls show, and projections based on
recent surveys suggest it may replace the Liberals as the main
opposition party in the House of Commons after next week’
election.

Prime Minister Stephen Harper has raised the prospect that
the opposition parties will combine and take power if his ruling
Conservatives don’t win a majority of seats. Both the NDP and
Liberals have said they will reverse past and planned reductions
in corporate income taxes that benefit companies like Bank of
Montreal (BMO) to help pay for new spending commitments.

“Uncertainty over the May 2nd Federal election is growing,
with the small potential of an NDP-led minority government
weighing on markets more than the potential of a conservative-
led majority,” Camilla Sutton, chief currency strategist at the
capital markets unit of Toronto-based Bank of Nova Scotia, wrote
in an e-mail. Without the broad-based selling pressure that is
hitting its U.S. counterpart, the Canadian dollar would likely
have weakened to beyond 96 cents per U.S. dollar because of the
election, she said.

The Canadian dollar was 0.1 percent stronger at 95.05 cents
per U.S. dollar at 3:40 p.m. in Toronto, from 95.16 cents late
yesterday. One Canadian dollar buys $1.05208.

Spending and Taxes

“A coalition government in general means more spending and
higher taxes,” Sheryl King, head of Canada economics at Bank of
America Merrill Lynch in Toronto, said in an e-mail. “I do not
think the corporate tax hike will be sufficient. Higher taxes
elsewhere will have to occur as well.”

The NDP has surged in voter support, led by gains in
Quebec, since leader Jack Layton’s performance in two televised
debates this month. The NDP is now the most popular party in the
French-speaking province, according to the polls.

The increase in support has led Layton’s opponents to focus
on his party’s platform, which promises C$68.9 billion ($72.4
billion) in new spending over four years to be financed by
raising corporate taxes, cracking down on tax havens, ending
subsidies for fossil-fuel exploration that benefit companies
like Calgary-based Suncor Energy Inc. (SU), and revenue from a cap-
and-trade system for carbon.

Unlikely ‘Relevant’

Still, the rising NDP support isn’t likely to be
“relevant” for bond investors as long as they remain out of
power, said Ed Devlin of Pacific Investment Management Co.,
which manages the world’s largest bond fund.

The two most likely outcomes of the election are a majority
Conservative victory, or another minority Parliament with Harper
returning to power, Devlin said. The Liberals probably won’t
back a coalition led by the NDP to replace Harper, he said.

“The markets right now are probably pricing in another
Conservative minority government,” Devlin said in a telephone
interview. The rise of the NDP “makes great political theater,
but from a markets perspective, while it could create some
volatility, I can’t see a resurgent NDP being relevant,” he
said.

Harper, speaking at a campaign rally in Waterloo, Ontario,
again framed the election as a choice between a stable, majority
government that focuses on the economy and a government
consisting of smaller parties that will lead to higher taxes.

‘Clarifies the Choice’

“The fact that the NDP may be the leading opposition
party, that I think actually clarifies the choice,” Harper told
reporters today. The opposition parties “have economic policies
that are simply not credible, policies that are designed for
opposition rather than for actually governing.”

Layton defended his party’s platform at a campaign stop in
Winnipeg, Manitoba. “We would be providing very stable and
predictable conditions for business,” he said today, pointing
to the fiscal record of NDP provincial governments in Manitoba
and Nova Scotia. “Our economic approach would be step-by-step,
affordable, and realistic. That’s what I think businesses are
looking for.”

Tom Nakamura, a fixed-income portfolio manager for AGF
Investments Inc. in Toronto, who helps oversee about C$6
billion, said international investors may not be comfortable
with the idea of the NDP holding a share of power. “It would
create uncertainty,” he said by telephone. “The global
community isn’t used to thinking of a more left-leaning
government,” adding it could delay Canada’s return to balanced
budgets.

Still Nakamura said the NDP would likely be restrained by
“other voices in Parliament.” The country has “a much better
starting point in terms of fiscal health,” he said. “I don’t
think it’s drastic.

Polls

The NDP has 30 percent support among decided voters,
according to an Angus Reid Public Opinion poll, conducted for
the Toronto Star and La Presse newspapers. The governing
Conservative Party has 35 percent support, while the Liberals,
who had the second-most seats in the House of Commons, have 22
percent. The online poll surveyed 2,040 Canadian adults on April
25 and 26. It carries a margin of error of 2.2 percent, 19 times
out of 20.

The Angus Reid poll was supported by two other polls that
showed the NDP in second place nationally and leading in Quebec.
The latest CTV/Globe/Nanos tracking poll gives the NDP 28
percent support, 10 percentage points behind the Conservatives
and five percentage points ahead of the Liberals. The telephone
survey of 1,200 adults was conducted by Nanos Research April 23
to April 26 and has a margin of error of 2.8 percent.

A poll by Ekos Research taken for iPolitics.ca shows the
New Democrats with 28 percent support, compared with 34 percent
for the Conservatives and 24 percent for the Liberals. The
telephone survey of 2,532 adults was taken April 23 to April 25
and has a margin of error of 2 percentage points.

In the 2008 election, the Conservatives won 143 seats with
38 percent of the vote, while the NDP won 37 seats with 18
percent. The Liberals took 77 seats with 26 percent of the vote.